Pensions paid for service carried on outside the UK

Some pensioners receive occupational pensions paid from the UK, but will have spent all of their working years, or a substantial period of service, performing duties outside the UK.

Strictly, ITEPA03 charges all pensions paid from the UK to income tax. However Regulation 57 of the Income Tax (PAYE) Regulations 2003 only imposes an obligation to operate PAYE on payments to a non-resident pensioner of pension which does not arise wholly from an employment carried out abroad. If the pension does arise wholly from an employment carried out abroad the pension is still charged to tax, but there is no obligation on the payer to operate PAYE.

Although the pension may be outside the operation of PAYE it is important to note that unless the pension is exempted by a Double Taxation Agreement the income will still be taxable in the UK via Self Assessment. Whilst many of the UK’s DTAs will exempt the pension income, not all do so. You must review the relevant DTA when a claim is made to exempt the pension from UK taxation.

Subjects needing special care

A pension paid by an employer (or the employer’s successor within the UK) to a former employee or dependants, is liable as pension income. This applies whether or not the pensioner is resident or not resident in the UK.

The CWG2 Employer Further Guide to PAYE and NICs sets out the procedures that apply when a pension starts.

The remainder of this subject is presented as follows

When is PAYE to be applied?

PAYE applies to all pensions paid to non-residents except where the pension arises wholly from an employment carried on abroad.

In practice, the term ‘wholly from an employment carried on abroad’ is extended to apply to pensions where

The last ten years service in respect of which the pension is paid was abroad

Or

The service abroad amounted to

Half the total service in respect of which the pension is paid

And

At least ten of the last twenty years

An employment is regarded as having been carried on abroad if

The last ten years service in respect of which the pension is paid was abroad

Or

The service that was carried out abroad amounted to half of the total service in respect of which the pension is paid

And

Covered at least ten of the last twenty years.

UK duties

Any year where and individual performs duties in the UK cannot be a year when the employment was carried on abroad. Years of service refer to fiscal years. So any tax year in which an individual performs any duties in the UK, other than merely incidental duties, cannot be counted as a year of foreign service.

Example 1 - last ten years of service performed abroad

An employee commenced employment with a UK supermarket chain in 1986 in the UK. In 1988 the employee moves to Paris and worked in France until retiring in 2000. The employee has remained not resident in the UK and is now receiving a pension.

Result

The employee has performed all of their duties for the last 12 years of employment outside the UK. As the last ten years of service have been performed outside the UK then PAYE will not apply to the occupational pension whilst the pensioner remains not resident in the UK.

Example 2 - total length and location of service

An oil engineer has worked in the UK and overseas for the same UK company as detailed in the table below. The employee retired in 2000, remained not resident and has started to receive an occupational pension for the employment.

Whilst working abroad no duties were performed in the UK.

Date

Location

Length of service

Jan 1975 to Dec 1977

UK

3 years

Jan 1978 to Dec 1980

Saudi Arabia

3 years

Jan 1981 to Dec 1985

Brazil

5 years

Jan 1986 to Dec 1993

UK

8 years

Jan 1994 to Dec 1996

Singapore

3 years

Jan 1997 to Dec 2000

Australia

4 years

Total length of service

26 years

Total years worked in UK

11 years

Total years worked abroad

15 years

Result

This employee has not spent the last ten years of service abroad. He only spent 7 years in Singapore and Australia following UK departure in December 1993. Therefore you should consider - was half the total length of service performed abroad?

To determine this you should take the total of years worked abroad as a fraction of the total length of service and multiply this figure by 100. Using the above example that gives 15 divided by 26 (0.577) x 100 = 57.7%.

You then need to also consider if at least ten of the last twenty years service was performed abroad?

Between January 1981 and December 2000 this employee worked for 12 years abroad. Therefore

Over half of the total service has been performed abroad.

At least ten of the last twenty years service has been performed abroad.

In this case the employment is regarded as carried on abroad, and PAYE would not be applied to the occupational pension whilst the pensioner remains not resident in the UK.

Pension paid for same employment

Importantly, you should note that the pension must be paid for employment with the same employer. In other words a pensioner cannot combine the length of overseas service performed with a number of different employers.

Successive employments

Periods of employment with different members of the same group of companies should be treated as a single employment.

Length of service

You must consider the length of service to the employer outside the UK, and not the length of time spent outside the UK. A pensioner may well have retired a few years before their occupational pension commences.

Entire employment was carried out abroad

In these cases the length of service for which the pension is paid is not relevant. When someone has worked entirely outside the UK (for a UK employer) for the whole period of their employment, the pension will be outside the scope of the PAYE regulations.

Example a non-resident of the UK is recruited by a UK company to work for it in another country. The person is employed for 8 years and, at retirement age, becomes entitled to be paid a pension by the UK employer.

Result

As the person spent the entire period of their employment outside the UK then PAYE will not apply to the pension whilst the pensioner remains not resident in the UK.

What you need to do when a pensioner leaves the UK for permanent residence abroad

Residence treatment

If not resident - refer to the sub heading and corresponding text, ‘When is PAYE to be applied?’ above to decide if the pension falls into this category

Pension is regarded as paid in respect of an employment abroad

The pension will not be charged to tax whilst the pensioner remains non-resident.

Action

Year of leaving the UK - Code NT

Following years - Code NT

Note: If the pensioner becomes resident again, the NT coding no longer applies - change code to include the appropriate allowances.

Pension paid in respect of employment carried on in the UK

The pension will remain liable to UK tax while the pensioner is not resident. Where a claim to exempt a pension from UK tax is made under the terms of a double taxation agreement, you must not automatically allow the claim. Refer to PAYE81000 onwards, where the conditions to satisfy a claim to exemption are explained.

Action

Year of leaving the UK - continue current code but reduce this by any other untaxed income, state pension / interest

Following years - refer to RDRM10300 onwards to decide if allowances can be given

If allowances are due, include in the coding but reduce by untaxed income, for example state pension / interest and so on

If allowances are not due - Code 0T and set the No Allowances indicator on NPS (PAYE103065)

UK state retirement pension payable to non resident

The pension remains liable to UK tax while the pensioner is not resident. Where a claim to exempt the state pension from UK income tax is made under the terms of a double taxation agreement, you must not automatically allow the claim. Please refer to PAYE81000 onwards where the conditions to satisfy a claim to exemption are explained.

If a claim is not made under a double taxation agreement or the DTA claim is not allowed, you must consider whether Section 811 ITA 2007 applies - see PAYE13144.

Unless the taxpayer takes up residence in a country with which the UK has a reciprocal Social Security Agreement allowing for pension increases, their UK state pension will remain at the level it was on leaving the UK. In these cases, you should set the Static NIB indicator on the NPS record (PAYE130065).

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